Research and teaching material on business models, innovation, and entrepreneurship

Monthly Archives: February 2013

The other “Swiss” case that I teach, in addition to Swatch, is the Nespresso Story. Although, again, this case involves a new product, the Nespresso machine and its capsules, it also contains elements of business model innovation, imported by Nestle to the coffee industry from other spheres. Nespresso capitalizes on the well-known business model called razor-and-blade model, practiced for instance by Gillette: the Boston-based company has been selling razors at cost while making its profits on the blades. Other companies have used this strategy, such as printer firms, known for making their profits on the ink cartridges rather than on the printers themselves. Apple has applied this model “in reverse”, when through the creation of iTunes it made its iPod sales explode.

But who was the first one, the originator? A difficult question to answer in the business world, where imitation thrives in the same industry or across industry boundaries. In my genealogy of business ideas, I go back all the way to George Eastman. When he invented first the film roll and then the Kodak camera, he commercialized the new product with an astute and innovative business model: the camera was preloaded with film for 100 exposures, sold to customers, who then had to send the whole camera back to the company to have their prints developed, new film inserted, and the camera shipped back to the customer again (Chandler, 1977: 297). “You press the button, we do the rest” the advertising slogan in 1888 ran. Thus, Eastman figured a way for Kodak to have a continuous revenue stream, based not only on selling the new product, camera, but on supplying film and developing pictures for its customers.

Similarly, Nespresso sells its machine at cost, while making most of its profits on the capsules. An ingenious system, for which the first patent was deposited in 1974. Interestingly, it took the company until 1995 to break even on this R&D project, that first catered to the restaurants, then tried its luck with the office market, before turning to the households as the last resort to sell the new machine. Although slow, the success has crowned Nestle’s R&D efforts with this “skunk works” project.

Today, Nespresso faces new challenges, due to its success – imitation. It first started with Senseo, developed by Philips in 2001 for the mass-market, and has continued since, especially annoying for the Nespresso model being companies attempting to supply capsules that can be used with the existing Nespresso machines. For instance, banking on the Nespresso capsules being made from aluminium and not that environment-friendly, Ethical Coffee Company, led by one of the Nespresso’s own ex-employees, tries to sell recyclable capsules, while ridiculing Nespresso for going to court to try to stop them:

Who is right, who is wrong in this case? Difficult to decide, but the message remains clear: if successful, any innovator has to carefully consider and anticipate how to prevent imitators from appropriating value from the original innovation.

In my teaching on innovation I use two cases that both originate in Switzerland, which Douglas Adams used to call “small, hilly country. Tiresomely neat.” in ‘Mostly Harmless’. Althoughstereotyped as a conservative land of financiers and remote alpine villagers, Switzerland has provided a sweet home to several innovative companies and imaginative entrepreneurs. It is also home to CERN, and several good business schools and universities, such as IMD and EPFL in Lausanne, that are supposed to foster and nurture innovation.

One of the cases is Swatch, or the story of how Nicolas Hayek transformed the dying Swiss watchmaking industry, bringing it a second youth through the creation of Swatch, a brand, a new consumer product category, and a new business model of selling watches as fashion accessories rather then “family jewels” or pragmatic “time-keeping devices”. Through this act of innovation, but also imagination, Hayek and his company renovated the dormant Swiss watch industry and cemented the market share for what became the Swatch Group, the biggest watch-making portfolio of brands in the country.

Hayek was actually asked to conduct a liquidation of two ailing Swiss watchmakers by their bankers in the early 1980ies while he was a successful management consultant in Zurich. Facing fierce competition from the Japanese and the Americans after the quartz technology was originally pioneered by the Swiss, the industry was in dire straits. Still today, Switzerland remains, ahead of the US, one of the top watch-manufacturing countries, selon the Economist. Hayek was also the entrepreneur behind the original concept and then design of the SMART car, whose name stands for Swatch+Mercedes+ART (originally known as the Swatch-mobile, before the JV with Mercedes).

The story of Swatch is an interesting example of a turn-around through innovation that changed the fate of not only one company, but the whole Swiss watch-making industry, despite the high challenge of commoditization that threatens so many and spares so few. Successful introduction of a new product, redefining the existing categories, and changing the consumption patterns of customers, is a big achievement. I also believe that it would not have been possible without these significant elements of business model innovation – for instance, introducing in-store Swatch boutiques or partnering with well-known designers at the Swatch brand level, and centralizing production still carried out mainly in Switzerland and exploiting significant economies of scale for both low-priced and high-priced brands, while decentralizing brand marketing efforts at the Swatch-group corporate level.

While working on my thesis, one idea that I am playing with lately is understanding innovation as the combination of old things, or as Weick put it some time ago, “putting old things in new combinations and new things in old combinations” (1979: 252). As children, we learn about the world by imitating others. This imitation streak stays with us in the adult life. For instance, when travelling from one country to another, we adapt to new surroundings by imitating what the locals do. From individual level of analysis, the same phenomenon of imitation can be transferred to the firm level by the force of analogy. Many innovations in the business world originate as improved imitations, or borrowings, from other industries, smartly transformed and well-fitted to new environments.

Gutenberg, the inventor of the printing press, and an entrepreneur in his own right, provides a good example of this recombination, or bricolage, process. Steven Johnson describes him thus in his “Where Good Ideas Come From” (2010: 152):

“Sometime around the year 1440, a young Rhineland entrepreneur began tinkering with the design of the wine press. He was fresh from a disastrous business venture manufacturing small mirrors with supposedly magical healing powers, which he intended to sell to religious pilgrims (The scheme got derailed, in part by bubonic plague, which dramatically curtailed the number of pilgrims). The failure of the trinket business proved fortuitous, however, as it sent the entrepreneur down a much more ambitious path. He had immersed himself in the technology of Rhineland vintners, but Johannes Gutenberg was not interested in wine. He was interested in words.

As many scholars have noted, Gutenberg’s printing press was a classic combinatorial innovation, more bricolage than break-through. Each of the key elements that made it such a transformative machine–the movable type, the ink, the paper, and the press itself–had been developed separately well before Gutenberg printed his first Bible. Movable type, for instance, had been independently conceived by a Chinese blacksmith named Pi Sheng four centuries before. But the Chinese failed to adapt the technology for the mass production of texts, in large part because they imprinted the letterforms on the page by hand rubbing, which made the process only slightly more efficient than your average medieval scribe. Thanks to his training as a goldsmith, Gutenberg made some brilliant modifications to the metallurgy behind the movable type system, but without the press itself, his meticulous lead fonts would have been useless for creating mass-produced Bibles.

It is clear that Gutenberg had no formal experience pressing grapes. His radical breakthrough relied, instead, on the ubiquity of the screw press in Rhineland wine-making culture, and on his ability to reach out beyond his specific field of expertise and concoct new uses for an older technology. He took a machine designed to get people drunk and turned it into an engine for mass communication.”

In 2013, once again, the Ise Shrine will be reconstructed in Japan. For the 62nd time. Every 20 years, this famous Shinto temple changes its physical form and location. It is home to two kamis, Amaterasu Omikami, an ancestor of the Imperial Japanese family, and Toyouke Omikami, bestowing rice and other foods, clothing, and shelter. The Shikinen Sengu ceremony has it that every 20 years the building, treasures, and food in this temple have to be renewed, in the same prescribed manner over the passing centuries.

This is an interesting tradition for the innovation scholars, as it emphasizes both change and following the rules. Although paradoxical, this is also the advice from the recent management literature on ambidexterity, or how firms should both excel at exploiting the routines set up for their current businesses while at the same time exploring the frontiers and innovating, even renewing themselves.

For business model innovation students, the conundrum is even more difficult as innovating business models is more challenging and often more costly than innovating a product or a process. Business models are tightly coupled with firm identities, thus changing or renewing them is more risky. How can established firms face this challenge of renewal? Maybe the analogy of the Ise Shrine and its ceremonies hides some answers about the solution to the paradox of efficient routines and successful renewal?

I will leave you to your own reflection with this video about IDEO and their way to design new products through a rather routinized innovation process. You can read more about IDEO in Hargadon, Andrew, and Robert I. Sutton. “Technology brokering and innovation in a product development firm.” Administrative science quarterly (1997): 716-749.:

I first came upon the reference to the Ise Shrine and its renewal while reading Mihaly Csikszentmihalyi’s classic book, the “Flow” (p. 80). Further research on the topic and interpretations are my own.

During the last year I have been involved with the Metronomics Global Health Initiative, an organization founded by pediatric oncologist Nicolas André, with help from Eddy Pasquier and Marc Le Menestrel. This project tries to combine cutting-edge scientific research, new business models, and social innovation to develop alternative anti-cancer strategies to benefit children in the developing world.

Our co-authored paper with Nicolas André, Shripad Banavali, and Eddy Pasquier, titled “Time for Metronomics in developing countries?”, in which we explain the importance of Metronomics and the interest of complementing this treatment with new business models, has been accepted for publication at the Lancet Oncology, one of the leading oncology journals. Please refer to our article in full for further information (André, N., Banavali, S., Snihur, Y., and Pasquier, E. “Time for Metronomics in Developing Countries?” Forthcoming in the Lancet Oncology)

As a preview, below I include a short video from the Metronomics Initiative’s website:

This video actually made me think of another initiative, Immunize India, that Gopala Krishnan (GK) has been spear-heading in India. It is a national free vaccination reminder service that works through SMS: after sending their request by text message, parents receive free automatic reminders to vaccinate their children during the next 15 years. Video below:

This week I have been teaching a case written by Chris Zott about GK and his business and social ventures in India (to be published by IESE). One of the learning points from GK, and this video in particular, is how to leverage new (business) models in combination with symbolic management to acquire resources for various entrepreneurial ventures. Both the Metronomics video and the Immunize India video use emotional appeal (pathos). Both also introduced facts and figures (logos), showing for instance how immunization reminders have been successful in other countries and medical studies. This 4-minute video enabled GK to gain the support of IAP (Indian Academy of Pediatricians), or acquiring ethos, and thus begin building legitimacy and credibility for his initiative. Let’s see if both Immunize India and Metronomics become successful and help save lives.

I have been looking for interesting TED talks to use during the entrepreneurship class. I found these two, the first one by Steven Johnson:

I especially like the emphasis on the social origin of ideas.

And here is the second one by Seth Godin, focusing on “remarkable,” a different approach to convince students of the differentiation strategy merits in Porterian jargon:

I also used to have a session on leadership where I would build on Jim March’s film extracts about Don Quixote’s Lessons for Leadership as well as this TED talk where Itay Talgam, an Israeli conductor, talks about different conductors and their styles:

Why the music analogy, you might ask? As Itay says, “Music making embodies knowledge and innovation, individual effort and collective achievement.” For more musical inspirations, this is a very good example of a successful performance led by Gustavo Dudamel, the Venezuelian star conductor, that might serve as an “analogous inspiration” for the entrepreneurs:

Any other recommendations? I am sure there are many more interesting videos out there!